China Carmakers Urge Foreign Ownership Cap to Remain for 5 Years

China should keep the 50% cap on foreign ownership in local passenger-vehicle joint ventures for at least another five to eight years to ensure Chinese carmakers are ready for full-fledged competition, according to the state-backed auto association.

The government can consider lifting the limit on different parts of the automotive industry according to their maturity, starting with the motorcycle industry in one or two years, followed by commercial vehicles in three to four years, Ye Shengji, deputy secretary general of the China Association of Automobile Manufacturers, said in an interview on Saturday in Tianjin. The cap on passenger vehicles should be the last to go, he said.

China requires overseas companies to set up joint ventures with domestic partners as part of an industrial policy to ensure local carmakers gain technology and operational know-how. The debate over whether it’s the right time to revise the policy was reignited after Xu Shaoshi, chairman of the National Development and Reform Commission, said in June the government is looking into lifting the 50% cap.

“While removing the caps is something that can’t be stopped, it should happen in a gradual and orderly manner and not all at one go,” Ye said, adding that the association has communicated its position to the NDRC and Ministry of Industry and Information Technology, the industry’s two principal regulators.

Criticism of Industrial Policy

The policy has been criticized in recent years for shielding state-owned companies from competition and reducing the drive to build their own brands. Its supporters say the rule gives China’s automakers a chance to build enough scale and develop technology to withstand global competition.

CAAM has been vocal in its opposition to lifting the ownership cap, arguing that local companies are too weak to be able to compete with the likes of General Motors Co. or Volkswagen AG. In February 2014, the trade group warned that Chinese brands will be “killed in the cradle” if the government allows foreign automakers to become more independent from their domestic partners, after a commerce ministry official said that automakers should prepare for the day when the limits are relaxed.

Even so, the central government has already begun relaxing the policy, saying in July that it’ll exempt foreign makers of motorcycles and batteries from ownership limits in their manufacturing operations in selected free trade zones. Manufacturers such as Yamaha Motor Co. and Samsung SDI Co. previously were required to partner with local companies and could own as much as 50 percent of joint ventures.

“If you open up fully now to foreign companies, those domestic brands and privately owned automakers won’t survive because the entire supply chain will be in foreign hands,” Ye said.